Traditional financial institutions have long offered loans to business, consumers, and other entities. A small business, for example, would apply for the loan by going in person to a bank branch or corresponding with a finance manager and submit a request for a loan amount. The bank may review the small business for financial health before approving a line of credit or a loan. Business owners often desire to avoid the hassle associated with traditional business loans, which may involve in-person visits to a bank branch and a lengthy, time-consuming application process. However, business expenses come up frequently. Bills and invoices can come in at any moment, and the company may not always be in a sufficiently liquid position to dispatch payment in a timely manner.
Credit cards and lines of credit may provide some flexibility in paying bills and managing cash flow without the hassle of applying for a loan or loans to pay expenses. However, those payment sources may also come with high fees or interest rates and paying bills with expensive sources of funds may not be in the company's best interest. Moreover, the short-term nature of credit cards may not provide sufficient time for repayment without incurring those high fees or interest rates, while the time-consuming application process and the long-term, evergreen nature of lines of credit may be daunting.
Factoring and other third-party financing arrangements may also provide some flexibility to manage cash flow, but typically include double-digit interest rates and are typically for businesses with low credit or little to no access to capital.